Pent-Up Demand Negates Impact of Record-High Apartment Deliveries in San Diego

What a difference a decade makes. Not only has the U.S. housing market recovered from the Great Recession, but in some cities, housing prices now top the 2005-06 peak. Developers are racing to bring new apartments online. Nationwide, apartment construction is at its  highest level in 20 years.

For perspective: between 1997 and 2006, annual apartment completions averaged 212,740 units. In 2017, apartment completions were expected to top 346,310 units, a staggering 21% increase compared to the year before, according to  Yardi Matrix.

Most of this growth is happening in large coastal cities, from Boston to Miami, Seattle to San Francisco.

The San Diego-Carlsbad, CA region added 4,668 new apartment units in 2017. This puts the region just 150 units shy of cracking the top 20 metros in the U.S. for new apartment supply last year. (Portland, OR came in at No. 20 with 4,802 units added).

There’s reason to believe San Diego is set to catch up. San Diego apartment deliveries hit a high in 2017, with a noticeable spike towards the end of the year. An estimated  2,800 rental units were expected to come online in Q4 alone – the strongest quarter for delivery volume since at least 2001. Nearly half of these units are located in downtown San Diego.

What’s more, these numbers only reflect the units that were actually delivered last year. San Diego is experiencing a surge in multifamily construction, as vacancies continue to drop and developers try to cash in on a strong economy and growing population. Throughout San Diego County, an estimated  11,000 additional units are still under construction. Outside of downtown (3,300 units), the most prominent submarkets for new construction are Mission Valley (1,579 units), North Country (1,298 units) and the South I-15 Corridor (1,154 units).

Notable multifamily projects include  One Paseo in Carmel Valley (608 units), Phase II of  Pinnacle on the Park in East Village (472 units), and  Hanover Mission Gorge in Grantville (757 units) which actually just began leasing.

One would think that all of this construction would relieve some of the pressure on San Diego’s red-hot rental market. Yet high construction costs, including a lack of developable land, continue to be a barrier for the level of development that’s needed to meet pent-up demand. Historically low vacancy rates, which hover around 3%, will mostly negate the effects of upcoming apartment deliveries.

As a result, we expect to see San Diego rents – which  reached all-time highs in 2017 – continue to climb this year.

The apartment market will continue to flourish, buoyed by the county’s growing innovation economy, tourism, large military presence and some of the most desirable weather in the U.S. Employment is expected to increase another 1.6% this year, with employers on pace to add nearly 24,000 more jobs. This will further strain San Diego’s already tight multifamily market.

“There’s a lot to love about San Diego’s apartment market,” says Denia Ray, Mynd Regional Property Manager. “Record rates of absorption, increasing rents, and strong market fundamentals make San Diego a prime target for real estate investors looking for long-term buy and hold opportunities.”

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